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ECON7030 MICROECONOMIC ANALYSIS
EXERCISE 2
PRISCILLA MAN
General Instructions
This exercise is due on 10th February at 13:00 (1:00pm) AEST. It is worth 30% of your
final mark for this course.
Answer all questions. There are five (5) questions in Section A and two (2) questions
in Section B. There is a total of 60 marks.
You can type or handwrite your answer. If you type, please save your answer as a word
or pdf file. If you handwrite your answer, please scan your answer into a pdf file (not png
or jpg). In either case, you should submit your answer through the Turnitin submission
link on the course Blackboard site before the due date.
You are not allowed to consult any other person for this problem set. You can use
resources such as textbooks, lecture notes or online resources provided that you reference
them using a standard citation style (e.g., Harvard or APA).
If any technical problem arises and you fail to submit your answers on time, please
contact the course coordinator (Dr. Priscilla Man, [email protected]) as soon as possible
with the appropriate documentation of the technical problem.
Questions continue on the next page
Date: 7th February, 2022.
1
Section A: Short Questions (30 marks total) Determine whether each of the following
statements is True, False or Uncertain, and explain your answers. Answers without
explanations will not be marked. Your answers are not supposed to be long. You should
aim at half a page per question if you are hand-writing, or one-quarter of a page per
question if you are typing. Marks will be deducted for extraneous answers.
1. (6 marks) Jiwa and Niuwa are two students, who use time (the only input) to
produce marks (the output) by studying. They are in the same market for marks,
which rewards each student with a fixed price per mark obtained. They also
have the same time cost. For simplicity assume that there is no upper bound
to marks. Jiwa is a mediocre student who struggles a lot in classes. Niuwa is
an extremely bright student who can get all the subtle implications without even
paying attention in lectures. In equilibrium, Jiwa’s value marginal product (VMP)
of the last hour in studying is strictly lower than that of Niuwa.
2. (6 marks) Suppose students’ educational experience is produced by two inputs:
academic content and student support services. If academic salaries rise relative
to the cost of providing student services, universities will provide relatively less
academic content and relatively more supportive services to their students.
3. (6 marks) Gary buys boxes of strawberries but only enjoys eating sweet straw-
berries. (The non-sweet strawberries give him neither utility nor disutility.) He
cannot verify the exact number of sweet strawberries in each box before pur-
chasing but knows the average proportion of sweet strawberries. If there is an
improvement in strawberry farming technology such that the proportion of sweet
strawberries in each box is doubled, Gary will buy more strawberries than before.
4. (6 marks) Once a movie is produced, the distributor is the monopolist selling the
movie. Suppose movie distribution involves only fixed cost but no marginal cost.
If the distributor practises simple monopoly pricing, the demand at the quantity
sold is strictly price elastic (that is, the absolute value of the price elasticity of
demand at the quantity sold is strictly greater than 1).
5. (6 marks) If the endowment point of an economy is Pareto optimal, there will be
no gain from trade between the consumers.
Questions continue on the next page
2
Section B: Long Questions
Question B1 (10 marks total)
Alex consumes only two goods: chicken and beef (Alex’s mother had told him to eat
vegetables but he wouldn’t).
(a) – (c) (2 marks each) Recover the numbers in the marked cells in the table below.
Show your calculations.
Good
Expenditure
Share
Income
Elasticity
Marshallian
Own-Price
Elasticity
Hicksian
Own-Price
Elasticity
Chicken 0.4 (a) (b) −2.1
Beef 0.6 2 −2.6 (c)
(d) (2 marks) Is chicken an inferior good? Why or why not?
(e) (2 marks) Is chicken a Giffen good? Why or why not?
Questions continue on the next page
3
Question B2 (20 marks total)
Elsa (consumer 1) and Anna (consumer 2) are the only two consumers in the economy.
Each of them consumes only two goods, ice blocks (good x) and snow cones (good y),
which they also own. Consumer 1’s utility function is given by
U1(x, y) = 3 lnx + ln y.
She has 18 units of x and 12 units of y. Consumer 2’s utility function is given by
U2(x, y) = lnx + 2 ln y.
She has 18 units of x and 6 units of y.
(a) (4 marks) Draw the Edgeworth Box of this economy, marking clearly the endow-
ment point. For each consumer, sketch the indifference curve passing through the
endowment point.
For the rest of this question, let p be the price of x and normalise the price of y to 1.
(b) (4 marks) Derive the demands for goods x and good y for consumers 1 and 2.
(Note: There are four demand functions that you need.)
(c) (4 marks) Find the equilibrium p.
(d) (4 marks) Find the equilibrium consumption bundle of each consumer.
(e) (4 marks) Mark your answer to part (d) in the Edgeworth Box you have drawn for
part (a). Draw the budget line under the equilibrium price. For each consumer,
draw the indifference curve passing through the equilibrium consumption bundle.
End of Questions